09TBILISI365, GEORGIA: INVESTMENT CLIMATE STATEMENT 2009

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UNCLAS TBILISI 000365
SENSITIVE
SIPDIS
DEPT FOR EUR/CARC, EEB/IFD: NATHANIEL HATCHER, GREGORY HICKS
PASS USTR
E.O. 12958: N/A
TAGS: EINVEFINETRDELABKTDBPGOVGG
SUBJECT: GEORGIA: INVESTMENT CLIMATE STATEMENT 2009
REF: 08 STATE 123907
¶1. Per reftel, Embassy Tbilisi submits its Investment
Climate Statement for Georgia for 2009.
Introduction
Since 2004 when the Saakashvili Government came to power, the
Georgian Government has undertaken an ambitious program to
modernize and liberalize its economy. Institutional reforms
include the restructuring and downsizing of government
ministries, the privatization of large state-owned entities,
increasing the pay of public servants, reducing the number
and rates of taxes, improving tax and fiscal administration,
streamlining licensing requirements, simplifying customs and
border formalities, and generally undertaking efforts to make
it easier to do business in Georgia. The current Georgian
leadership views liberal market economies like Singapore and
Dubai as models for its economic growth policies. Georgia,s
economy, which was on the path of steady double digit growth
since early 2004, suffered a considerable shock due to the
Russian invasion in 2008 and subsequent global credit crisis.
Nevertheless, Georgia still managed to achieve modest GDP
growth in 2008; it is unclear what the final numbers will be
in 2009.
The World Bank recognized Georgia as the world,s fastest
reforming economy in IFC,s 2007 &Doing Business8 report,
and its 2008 report ranks it as the world,s 18th easiest
place to do business, in league with countries such as
Switzerland, Estonia and Belgium. Georgia is ranked ahead of
France, Germany and the Netherlands. Georgia further
improved its rating in IFC,s &Doing Business 20098 moving
up from 18th to 15th place. For comparison, Russia ranks as
120, Kazakhstan 70, Azerbaijan 33, and Armenia 44.
The World Bank,s &Anti-Corruption in Transition 38 report
places Georgia among the countries showing the most dramatic
improvement in the fight against corruption, due to
implementation of a strong program of economic and
institutional reform. The report indicates that the amount
of money companies spend on bribes fell substantially in the
period covered. Reforms have increased tax revenues,
facilitating public investment and social sector expenditure
to address poverty. Electricity distribution has become much
more reliable. Paying customers in most parts of Georgia can
count on consistent 24-hour a day service, although service
can still be a problem in some remote rural areas.
The World Bank/IFC "Doing Business - 2009" report provides
objective measures of business regulations and their
enforcement across 181 countries and is a guide for
evaluating regulations that directly impact economic growth.
In terms of the pace of economic reform over 2007, The World
Bank ranks Georgia fifth after Egypt, Croatia, Ghana, and FYR
Macedonia.
Among the specifi achievements for which the IFC credited
Georgia in the 2008 report were strengthening investor
protections by amendments to its securities law that
eliminate loopholes which had allowed corporate insiders to
expropriate minority investors. Georgia adopted a new
insolvency law that shortens timelines for reorganization of
a distressed company or disposition of a debtor's assets. It
sped up the approval process for construction permits and
simplified procedures for registering property. It made
starting a business easier by eliminating the paid-in capital
requirement. In addition, the country's private credit
bureau added payment information from retailers, utilities,
and trade creditors to the data it collects and distributes.
Qand trade creditors to the data it collects and distributes.
IFC,s 2009 report singled out areas of Starting a Business,
Registering Property, Getting Credit and Paying Taxes, as
Georgia,s priority achievements in 2008. The report reads:
&Georgia,s private credit bureau now distributes a full
range of information, including on-time repayment patterns
and outstanding loan amounts. Coverage increased 20-fold, and
banks can now have a better understanding of the payment
patterns of potential borrowers. In addition, new regulations
guarantee the right of borrowers to inspect their data at the
private credit bureau, helping to improve the quality and
accuracy of credit information. Amendments to the civil code,
effective in December 2007, address secured transactions,
allowing parties to a security agreement to agree to
out-of-court enforcement of the creditor,s security right at
the time the parties sign the security agreement. The
corporate income tax rate was reduced from 20 percent to 15
percent, and the social tax abolished. A new online business
registry makes it easier to register property by eliminating
the requirement for legal entities to obtain several
pre-registration documents. This reform reduced the number of
procedures required to transfer a title from five to two, and
the time from five days to three. Registration fees were also
reduced. Finally, amendments to the Law on Entrepreneurs made
it easier to start a
company by eliminating the requirements
for a minimum capital, a company seal, and a company charter
and by making the use of notaries optional.8
Georgia scored high in the Economic Freedom Report jointly
undertaken by the Heritage Foundation and the Wall Street
Journal. The 2008 Index of Economic Freedom measures 162
countries across 10 specific factors of economic freedom,
such as Business Freedom, Trade Freedom, Fiscal Freedom,
Freedom from Government, Monetary Freedom, Investment
Freedom, Financial Freedom, Property Rights, Freedom from
Corruption, and Labor Freedom. Georgia's economy is above
average at 69.2 percent free (68.7 in 2007), which makes it
the world's 32nd freest economy and qualifies under the
category of 'moderately free', in the company of Spain,
Austria, Norway, the Slovak Republic, and the Czech Republic.
Georgia is ranked 18th out of 41 countries in the European
region, and its overall score is equal to the European
regional average. According to the report, Georgia scores
high in business freedom, fiscal freedom, freedom from
government, investment freedom and labor freedom, but needs
improvement in the areas of property rights protection and
corruption.
Prudent fiscal and monetary policies have supported a
relatively stable macro-economic environment and permitted
the government to pay attention to further reform. The
economy grew by 9.3 percent in 2005, and 9.4 percent in 2006
despite economic sanctions imposed by Russia, traditionally
Georgia,s most important export market. Growth in 2007 was
12,4 percent and 8.5 percent in the first half of 2008.
However, due to the August conflict with Russia and ensuing
global credit crisis, the overall estimated growth rate for
2008 is expected to be roughly 2 percent. Initial
projections for 2009 GDP growth are around 2 percent. Annual
inflation for 2006 was 8.8 percent. It increased in 2007 to
9.2 percent and increased again to 10 percent in 2008. The
government is committed to keeping inflation at the 7 percent
rate in 2009.
The Georgian Lari strengthened from 1.7 to about 1.6 per U.S.
dollar over the course of 2007, and further appreciated
against the dollar to 1.4 to 1 in the summer of 2008. The
lari subsequently dropped to 1.65 to 1 versus the dollar by
the end of 2008, affected both by the Georgia-Russia war and
the global credit crunch. Based on the economy,s overall
performance and the Georgian government,s strong commitment
to structural changes, Georgia received its first sovereign
credit rating in late 2005 from Standard and Poor,s -- a B
long term, and B short term rating. Standard & Poor's cut
Georgia's outlook to stable from positive in the beginning of
May 2008, citing worsening relations with Russia, but kept
its rating at B . The rating agency put Georgia on
CreditWatch on August 8, when fighting broke out in the
Georgian separatist regions, but removed Georgia,s ratings
from CreditWatch negative in September, 2008, citing the end
of fighting with Russia over South Ossetia and the provision
of foreign aid to Georgia. Currently Georgia,s long-term
Qof foreign aid to Georgia. Currently Georgia,s long-term
debt is rated B by S&P, and the outlook is now stable.
Fellow ratings agency Fitch currently rates Georgia, which
launched its debut $500 million Eurobond in spring 2008, as
BB- with a stable outlook.
Despite the improvements in the economy, more than 25 percent
of the population lives below the poverty line, and many
people still rely on subsistence agriculture. Greater
familiarity with western business practices and legalnorms
is required. Physical infrastructure, such as the road
network, saw considerable improvement over 2005-2008,
although much remains to be done, especially in rural areas.
Government has allocated USD 310 million (need USD
equivalent) for road rehabilitation projects in 2009. Most
natural gas for heating and electricity generation is
imported. Rehabilitation of existing hydroelectric power
plants and construction of new ones is gradually reducing
Georgia's dependence on imported energy.
The main source of sustained future economic growth will be
private investment, both domestic and foreign. The
government,s challenge is to implement existing legislation,
continue the fight against corruption, defuse tensions in the
separatist regions and undertake new reforms, in order to
increase investor confidence.
Georgia receives assistance from the United States, the
European Union and a range of international institutions.
U.S. assistance has focused on the goals of improving the
rule of law, governance and the administration of government
economic and financial institutions, improving critical
physical infrastructure, enhancing private sector
competitiveness and promoting the growth of a free market
economy. In 2006, Georgia,s clear-cut commitment to reform
earned it one of the first compacts with the U.S. Millennium
Challenge Corporation, which has provided investments in
infrastructure, tourism and agriculture.
After the August 2008 conflict with Russia, foreign donors
committed USD 4.5 billion to help Georgia recover from direct
and indirect war damage. According to the World Bank-led
international needs assessment for Georgia, the major impact
of the conflict was on the investment and consumer climate,
which led to a sharp economic drop in FDI and GDP. With this
in mind, the USG committed to a USD 1 billion assistance
package for Georgia dedicated to repair its damaged
infrastructure and help the Georgian economy recover from the
economic shock from the reduction in FDI immediately
following the August conflict.
President Saakashvili and his government have strengthened
Georgia,s bilateral relations with many countries, reaching
out to Ukraine, Turkey, Italy, Poland, Latvia, Lithuania,
Estonia, Japan, Kazakhstan, the UK, Germany, the Netherlands,
and of course, the United States. Georgia has a partnership
agreement with the European Union, and an action plan for
reform to allow a closer relationship. Georgia maintains the
goal of eventual membership in the European Union. Georgia
is one of only fifteen countries in the world that benefit
from GSP access to the EU market, allowing duty-free access
for more than 7000 products. It is making an effort to
harmonize its regulatory environment with international
standards, particularly those established by the EU. Georgia
enjoys duty-free trade with other former Soviet Union
countries. It benefits from preferential trading
relationship with the United States, Turkey, Canada,
Switzerland and Japan. In 2007 Georgia signed a free trade
agreement with Turkey and a Trade and Investment Framework
Agreement and an Open Skies Agreement with the United States.
Discussion of a free trade agreement with the European Union
is under way.
Georgia is located at the crossroad between Europe and Asia.
It is the shortest route from Central Asia to Europe, and
could be a North-South Bridge between Turkey and the Russian
Federation. Georgia has two deep-water ports on its Black
Sea coast. Labor costs in Georgia are compa
rable to the Far
East, while transit time for shipment of goods to Europe is
far less. The new government has launched an extensive road
rehabilitation project aimed at upgrading the road quality
and constructing new facilities to improve communication
infrastructure. The governments of Turkey, Azerbaijan and
Georgia have agreed to construct a rail link from Kars,
Turkey through Georgia to Baku, Azerbaijan. Freight from
Europe will be able to be transported through Turkey to Baku
via Tbilisi and then to Central Asia from Baku by ferry.
Ongoing construction of a tunnel under the Bosporus at
Istanbul means freight will soon be able to travel from
Georgia directly into Europe. In addition, Georgia is
improving its network of rail ferry connections with Black
Qimproving its network of rail ferry connections with Black
Sea countries, including Russia, Ukraine, Romania and Turkey,
which will further increase transportation and trade turnover
with these countries.
Georgia,s relations with its northern neighbor Russia have
been problematic. In 2005 and 2006, Russia banned imports of
Georgian agricultural products, mineral water and wine. At
the time, Russia was the largest importer of those products.
These restrictions continued into 2008. In September 2006,
Russia cut all direct transport links with Georgia. Gazprom,
the Russian gas monopoly, quadrupled the price of natural gas
supplied to Georgia over two years. Despite these actions,
the Georgian economy has continued to grow. Georgian
businesses are actively seeking new markets for Georgian
products and new sources of imports, especially in Ukraine,
the Baltics and Central Europe. New supplies of natural gas
from Azerbaijan and increased hydroelectric generating
capacity are making Georgia less dependent on Russian energy
sources. The return of normal trading relations with Russia
could create significant opportunities for companies based in
Georgia.
Openness to Foreign Investment
Georgia is extremely open to foreign investment and is eager
to welcome new investors. The country is developing a
regulatory framework intended to foster competition.
Legislation governing foreign investment establishes
favorable conditions, but not preferential treatment, for
foreign investors. The Law on Promotion and Guarantees of
Investment Activity protects foreign investors from
subsequent legislation that alters the condition of their
investments for a period of ten years.
The U.S.-Georgia Bilateral Investment Treaty, in force since
1994, guarantees U.S. investors national treatment or most
favored nation treatment, whichever is better, in the
establishment, operation and sale of their investments.
Exceptions to national treatment may be made by Georgia for
investments in maritime fisheries; air and maritime
transport, and related activities; ownership of broadcast,
common carrier, or aeronautical radio stations;
communications satellites; government-supported loans,
guarantees, and insurance; and landing of submarine cables.
Legislation governing foreign investment includes the
Constitution, the Civil Code, the Tax Code, and the Customs
Code. Other legislation includes the Law on Entrepreneurs,
the Law on Promotion and Guarantees of Investment Activity,
the Bankruptcy Law, the Law on Courts and General
Jurisdiction, the Law on Limitation of Monopolistic Activity,
the Accounting Law, and the Securities Market Law.
Georgia has negotiated 34 agreements for avoidance of double
taxation, of which 22 have entered into force. The active
agreements are with Uzbekistan, Azerbaijan, Ukraine, Romania,
Bulgaria, Turkmenistan, Armenia, Kazakhstan, Iran, the
Netherlands, Greece, Italy, Belgium, Lithuania, Latvia,
United Kingdom, China, Austria, Poland, Czech Republic and
Estonia. Until treaties with France and Germany enter into
force, a similar agreement signed by the USSR governs the
issue. An agreement with Russia was signed in 1999 and
ratified by the Georgian parliament in 2000. It has not been
ratified by the Russian Duma, but the Russian side regards it
as an active agreement. Treaties with Germany, France,
Denmark, Finland and Turkey have been ratified by Georgian
parliament and are awaiting ratification by the respective
countries in order to enter into force.
The legal framework governing ownership and privatization of
property is established by the following acts: the Civil
Code, the Law on Ownership of Agricultural Land, the Law on
Private Ownership of Non-Agricultural Land, the Law on
Management of State-Owned Non-Agricultural Land, and the Law
on Privatization of State Property. Property rights in the
extractive industries are governed by the Law on Concessions,
the Law on Deposits and the Law on Oil and Gas. Intellectual
property rights are protected under the Civil Code, and by
the Law on Patents and Trademarks. Financial sector
legislation includes the Law on Commercial Banks, the Law on
National Banks and the Law on Insurance Activities.
Georgia does not screen foreign investment in the country,
other than imposing a registration requirement and certain
licensing requirements as outlined below. Foreign investors
have participated in most of the major privatizations of
state-owned property. Transparency of such privatizations
has at times been an issue, however. No law specifically
authorizes private firms to adopt articles of incorporation
which limit or prohibit foreign investment.
Qwhich limit or prohibit foreign investment.
In 2005, registration of businesses was simplified.
Paperwork and fees were reduced and processing time shortened
to about 8)10 days from the submission of documents. All
companies are required to register with the Ministry of
Finance, providing founder's and firm principals' names,
dates and places of birth, occupations and places of
residence; incorporation documents; area of activity; and
charter capital. This information is made public and any
person may request and review such information. Business
registration and tax registration are separate procedures
handled by the same department within the Ministry of Finance.
The Government of Georgia has privatized most of the largest
formerly state-owned enterprises in the country. A list of
entities still available to be privatized can be found on the
website www.privatization.ge. Information on investment
conditions and opportunities can be obtained from the Georgia
National Investment and Export Promotion Agency, e-mail:
info@investingeorgia.org, www.investingeorgia.org. Further
information is available at a website maintained by the
American Chamber of Commerce in Georgia,
www.investmentguide.ge.
In 2005, 84 percent of existing licensing requirements were
eliminated and a &one stop shop8 for licenses was created.
By law, the government has 30 days to make a decision, and if
no reasonable ground for rejection is stated by the licensing
authority within that time, the license or permit is deemed
to be issued. Construction permits can be obtained within 90
days, according to research published by the European Union.
Licenses are
only required for activities that affect public
health, national security and the financial sector.
Licensing currently is required in the following areas:
weapons and explosives production, narcotic, poisonous and
pharmaceutical substances, exploration and exploitation of
renewable or non-renewable substances, exploitation of
natural resource deposits, establishment of casinos and
gambling hoses and the organization of games and lotteries,
banking, insurance, trading in securities, wireless
communication services, and the establishment of radio and
television channels. The law requires the state to retain a
controlling interest in air traffic control, shipping traffic
control, railroad control systems, defense and weapons
industries, and nuclear energy. Only the state may issue
currency, banknotes and certificates for goods made from
precious metals, import narcotics for medical purposes, and
produce control systems for the energy sector.
Conversion and Transfer Policies
Georgian law guarantees the right of an investor to convert
and repatriate income after payment of all required taxes.
The investor is also entitled to convert and repatriate any
compensation received for expropriated property. Moreover,
Georgia has accepted the obligations of Article VIII,
Sections 2, 3, and 4 of the IMF Articles of Agreement, with
effect from December 20, 1996. IMF members accepting the
obligations of Article VIII undertake to refrain from
imposing restrictions on payments and transfers for current
international transactions and from engaging in
discriminatory currency arrangements or multiple currency
practices without IMF approval. By accepting the obligations
of Article VIII, Georgia gives confidence to the
international community that it will pursue sound economic
policies that will obviate the need to use restrictions on
the making of payments and transfers for current
international transactions.
Under the U.S.-Georgia Bilateral Investment Treaty, the
Georgian government guarantees that all transfers relating to
a covered investment by U.S. investors can be made freely and
without delay into and out of Georgia.
Foreign investors have the right to hold foreign currency
accounts with authorized local banks. The sole legal tender
in Georgia is the Lari (GEL), which is traded on the Tbilisi
Interbank Currency Exchange and in the foreign exchange
bureau market. There is no difficulty in obtaining foreign
exchange or significant delays in remitting funds overseas
through normal channels. Several Georgian banks participate
in the SWIFT and Western Union interbank communication
networks. Businesses report that it takes a maximum of three
days to transfer money abroad. There are no known plans to
change remittance policies. Travelers must declare at the
border currency and securities in their possession valued at
more than GEL 30,000 (USD 18,750).
Expropriation and Compensation
The Georgian Constitution protects ownership rights,
including ownership, acquisition, disposal or inheritance of
Qincluding ownership, acquisition, disposal or inheritance of
property. Foreign citizens living in Georgia possess rights
and obligations equal to those of the citizens of Georgia.
The Constitution allows restriction or revocation of property
rights only in cases of extreme public necessity, and then
only as directly allowed by law.
The Law on Procedures for Forfeiture of Property for Public
Needs establishes the rules for expropriation domain in
Georgia. The law allows expropriation for certain enumerated
public needs. It provides a mechanism for valuation and
payment of compensation, and for court review of the
valuation at the option of any party. The Georgian law on
investment allows expropriation of foreign investments only
with appropriate compensation. Recent amendments to the
expropriation law allow payment of compensation with property
of equal value as well as money. Compensation includes all
expenses associated with the valuation and delivery of
expropriated property. Compensation must be paid without
delay and must include both the value of the expropriated
property as well as the loss suffered by the foreign investor
as a result of expropriation. The foreign investor has a
right to review of an expropriation in a Georgian court. In
2007, Parliament passed a law generally prohibiting the
government from contesting the privatization of real estate
sold by the government before August 2007. The law is not
applicable to certain enumerated properties.
The U.S.-Georgia Bilateral Investment Treaty permits
expropriation of covered investments only for a public
purpose, in a non-discriminatory manner, upon payment of
prompt, adequate and effective compensation, and in
accordance with due process of law and general principles of
fair treatment.
Dispute Settlement
The Georgian investment law allows disputes between a foreign
investor and a governmental body to be resolved in Georgian
courts or at the International Center for the Settlement of
Investment Disputes (ICSID), unless a different method of
dispute settlement is agreed upon between the parties. If
the dispute is not considered at ICSID, the foreign investor
has the right to submit the dispute to any international
arbitration body which has been set up by the United Nations
Commission for International Trade Law (UNCITRAL) to resolve
the dispute in accordance with the rules established under
the arbitration and international agreement. Under the
U.S.)Georgia Bilateral Investment Treaty, investors have
additional rights.
Georgia is party to the International Convention on the
Recognition and Enforcement of Foreign Arbitration Awards.
As a result, the Government agrees to accept binding
international arbitration of investment disputes between
foreign investors and the state. The Ministry of Justice was
designated in December 2005 to oversee the government,s
interests in arbitrations between the state and private
investors.
It is recommended that contracts between private parties
include a provision for international arbitration of disputes
because of deficienciesin the Georgian court system.
Litigation can take excessively long periods of time. There
is concern about the adequacy of training of judges and about
their susceptibility to pressure from the government or other
outside influences.
Performance Requirements and Incentives
Performance requirements are not a condition of establishing,
maintaining or expanding an investment, but have been imposed
on a case-by-case basis in some privatizations, for example,
commitments to maintain employment levels or to make
additional investments within a specified period of time.
While many privatizations have proceeded smoothly and
regularly, the current government has used non-fulfillment of
performance requirements to justify rescinding privatizations
and re-selling enterprises, usually for higher prices,
sometimes to the benefit of other interested parties.
Most types of performance requirements are prohibited
by the
U.S.-Georgia Bilateral Investment Treaty.
The Government of Georgia does not offer incentives to
foreign investors, but relies on the many improvements it has
made in the overall business climate to attract them to
invest in the country.
Right to Private Ownership and Establishment
Foreign and domestic private entities may freely establish,
acquire, and dispose of interests in companies and business
enterprises, and engage in all forms of remunerative
activity. Some specific laws regulate business activity in
the banking, agribusiness, energy, transport and tourism
Qthe banking, agribusiness, energy, transport and tourism
sectors. To the extent that public enterprises compete with
private enterprises, they do on the basis of equality.
Foreign individuals and companies may buy non-agricultural
land in Georgia. Only Georgian citizens or companies may buy
agricultural land in their own name, but even agricultural
land can be purchased by forming a Georgian corporation that
may be up to 100 percent foreign-owned.
Investors should exercise extreme caution in purchasing
property in Abkhazia. Land for sale rightfully may belong to
internally displaced persons forced to leave Abkhazia in the
early 1990s and may have improperly been placed on the market
by the de facto authorities in Abkhazia. The government of
Georgia considers the sale of property in Abkhazia illegal
under Georgian law and property could be reclaimed by
original owners at a future date.
Protection of Property Rights
Secured interests in both real and personal property are
recognized and recorded. However, deficiencies in the
operation of the court system can hamper investors from
realizing their rights in property offered as security.
Foreign investors' interests have sometimes been harmed by
biased court proceedings, and by legislation and decrees that
clearly favor a Georgian entity or partner involved in the
enterprise. Judicial reform has been identified as a top
priority for the Georgian government since late 2005, but it
will take some time for court and legal reforms to bear
fruit. It is recommended that contracts between private
parties include a provision for international arbitration of
disputes.
Disputes over property rights made headlines in 2005-2007.
These cases have tended to undermine confidence in the
impartiality of the Georgian judicial system and rule of law,
and by extension, Georgia,s investment climate. Both
foreign and Georgian investors have expressed reservations
about the competence, independence and impartiality of court
decisions. In a few cases lower court decisions have changed
control of property or of entire enterprises on questionable
legal grounds or on the basis of forged documents. In some
cases these decisions have been reversed by higher courts or
government action, in others not.
Protection of Intellectual Property Rights
Georgia acceded to the WTO and the TRIPS agreement in 2000.
In 2004, the Georgian parliament ratified the Rome Convention
for Protection of the Rights of Performers, Producers of
Phonograms and Broadcasting Organization, and the Lisbon
Agreement on Denomination of Origin. In 2005, Georgia joined
WIPO International Convention for the Protection of New
Varieties of Plants. Georgia is a party to the Bern
Convention, member of the two WIPO digital treaties )
Copyright Treaty and Performance and Phonograms Treaty, the
Hague Agreement, and Budapest Treaty Concerning the
International Recognition of the Deposit of Microorganisms
for the Purpose of Patent Procedures.
Six laws regulate intellectual property rights. These
include: the Law on Patents, Law on Trademarks, Law on
Copyrights and Neighboring Rights, Law on Appellation of
Origin and Geographic Indication of Goods, Law on
Topographies of Integrated Circuits, and Law on IP Related
Border Measures. Georgian law now provides retroactive
protection for works of literature, art and science or sound
recordings for 50 years.
While Georgia has brought its legislation into line with
international standards, enforcement remains problematic.
Pirated video and audio recordings, electronic games and
computer software are freely sold in Georgia. Use of
unlicensed software in government offices and businesses is
common. Internet service providers host websites loaded with
unlicensed content. Responsibility for WTO compliance was
recently been transferred to the Ministry of Economic
Development, which still needs to develop its capacity in
this regard. The Customs Department is developing a new
Intellectual Property Objects Register to assist in
identification of counterfeit goods at the border.
Nevertheless, IPR awareness in the Department is low and
QNevertheless, IPR awareness in the Department is low and
hampered by frequent personnel changes. Further
clarification of responsibilities between the Ministry of
Internal Affairs and the Ministry of Finance is needed, as
the MOIA has authority over some types of property rights
protection, and the Ministry of Finance over others. Judges
and lawyers lack training in IPR issues. Georgia,s Patent
and Trademark Agency needs greater familiarity with emerging
technologies.
Transparency of Regulatory System
The Georgian government has made a commitment to greater
transparency and simplicity of regulation. Laws and
regulations are published in Georgian in the official
gazette, the Legislative Messenger. The number of taxes has
been reduced from twenty-two to six. The tax on corporate
profits is 20 percent. The tax on personal income was set at
a flat rate of 25 percent after a 2007 law increased the
personal income tax and eliminated the employer-paid social
tax on wages. The Value Added Tax is 18 percent. Despite
the duel economic shocks of the August conflict and the
credit crisis, the Government of Georgia further reduced the
personal income tax rate from 25 percent to 20 percent and
reduced the dividend income tax rate from 10 percent to 5
percent. Both reductions took effect on January 1, 2009.
This new initiative is an acceleration of legally binding
commitments, made earlier, to reduce the personal income tax
rate to 15 percent by 2013 and to further reduce the dividend
income tax rate to 0 percent by 2012. Legislation was passed
earlier in 2008 setting zero dividend and capital gains tax
rate with respect to publicly traded equities (defined as
having free float in excess of 25 percent). There are excise
taxes on cigarettes, alcohol, and fuel. Only three rates of
import duties exist, zero, 5 percent and 12 percent, and
nearly all goods, except for some agricultural products, are
taxed at the zero rate.
The Georgian National Investment and Export Promotion Agency
has established Business Information Centers in Tbilisi and
other Georgian cities. These centers are intended to provide
domestic and foreign businesses with a standard package of
information relevant to doing business in Georgia, and
specific information according to the needs of individual
businesses.
The Business Information Centers are also
conducting an ongoing public-private dialog to facilitate
communication between regulators and the business community.
International accounting standards became binding for joint
stock companies in Georgia from January 1, 2000. For other
institutions, such as banking institutions, insurance
companies and companies operating in the field of insurance,
as well as limited liability companies, limited partnerships,
joint liability companies, and cooperatives the standards
became binding on January 1, 2001. Private companies
(excluding sole entrepreneurs, small businesses and
non-commercial legal entities) are required to perform
accounting and financial reporting in accordance with
international accounting standards. Sole entrepreneurs,
small businesses and non-commercial legal entities perform
accounting and financial reporting following simplified
interim standards approved by the Parliamentary Accounting
Commission. Despite the legal requirement, the conversion to
international accounting standards is going slowly, in part
because many businesses have operated in the shadow economy,
or maintained two sets of books. Qualified accounting
personnel are in short supply.
Efficient Capital Markets and Portfolio Investment
The Georgian banking system is growing quickly. Currently,
the banking system consists of regional small- and
medium-sized banks, a handful of large banking institutions
based in Tbilisi with branch networks, and three foreign
banks (American, Turkish, and Azerbaijani). In 2007,
commercial bank assets grew by 70 percent and the profit of
commercial banks grew by 65 percent. Total assets of the
country,s 19 banks (13 of which have foreign capital) were
$4.5 billion at the end of 2006, 45 percent of GDP.
Credit from commercial banks is available to foreign
investors as well as domestic clients. Banks offer credit
cards and a variety of loans including mortgage loans. In
addition, the International Finance Corporation, European
Qaddition, the International Finance Corporation, European
Bank for Reconstruction and Development, the U.S. Overseas
Private Investment Corporation, the Millennium Challenge
Corporation and other international development agencies have
a variety of lending programs that make credit available to
large and small businesses in Georgia.
The limited number of foreign banks operating in Georgia
reflects in part the small size of Georgia,s financial
market. However, foreign investment in the sector is
significant, accounting for 67.6 percent of total bank
capital in 2007. In 2005, Russian, Kazakhstani, U.S., and
German capital was invested in Georgian banks. In September
2006, the French bank Societe Generale acquired 60 percent of
one of the leading Georgian banks, Bank Republic. In 2007,
growing interest towards Georgia,s banking sector was
demonstrated by the entrance of the British bank HSBC into
Georgia. Dabi Group acquired Standard Bank.
Georgian banks have remained solvent during the current
global credit crisis largely due to the mandated 13 percent
central bank reserve requirement and conservative lending
practices. The Georgian central bank relaxed the reserve
requirement to 5 percent in the aftermath of the war and in
response to the global credit crisis to try to inject
liquidity into the market and spur new lending. The reserve
requirement remains at 5 percent.
Domestic credit to the private sector rose by more than 70
percent in real terms during 2007. The law on commercial
bank activities has been amended to improve the transparency
of ownership and corporate governance of banks. In March
2006, the restriction under which one shareholder or a group
of joint shareholders could hold no more than 25 percent of
voting shares in a bank was abolished. A new law regulating
the activity of microfinance organizations came into force in
August 2006.
The National Securities Commission of Georgia regulates the
securities market. All joint stock companies with more than
50 shareholders -- currently about 1800 companies in Georgia
-- are required to submit annual, semi-annual and current
reports prepared in accordance with internationally accepted
accounting standards.
The small Georgian Stock Exchange was established with
assistance from USAID in 1999. The stock market organizes
public trading of securities and disseminates information on
trading results and prices. The GSE has a Memorandum of
Cooperation with the Thessaloniki Stock Exchange Center for
harmonization of trading platforms. Shares of 82 companies
were traded on the GSE in 2008, up from 57 in 2007). In
2008, the GSE executed 3,180 trades compared to 7,313 in
2007, with a total value of GEL 256.5 million (around $160.3
million) compared to GEL 97 million (around $54 million) in
¶2006.
No law or regulation authorizes private firms to adopt
articles of incorporation or association that limit or
prohibit foreign investment, participation, or control.
&Cross-shareholder" or "stable-shareholder" arrangements are
not used by private firms in Georgia. Georgian legislation
does not protect private firms from takeovers. There are no
regulations authorizing private firms to restrict foreign
partners' investment activity or limit foreign partners'
ability to gain control over domestic enterprises.
Political Violence
Georgia suffered considerable instability in the immediate
post-Soviet period. After independence in 1991, civil war
and separatist conflicts flared up in the areas of Abkhazia
and South Ossetia. The status of each region remains
unresolved and the central government does not have effective
control over these areas. The United States supports the
territorial integrity of Georgia within its
internationally-recognized borders. In August 2008, tensions
boiled over culminating in the brief war between Georgia and
Russia. Russia proceeded to invade and occupy portions of
undisputed Georgian territory and destroyed portions of vital
infrastructure, cut the main east-west highway and blockaded
the Georgian port of Poti. Nearly all the destroyed
infrastructure has been repaired and commerce has returned to
normal. While the separatist regions of South Ossetia and
Abkhazia have declared independence, thus far, only Russia
and Nicaragua have recognized them. Tensions still exist and
reports of violence both inside the breakaway republics and
near the administrative boundary lines are common, but other
parts of Georgia, including Tbilisi, are not directly
affected.
Corruption
Under President Saakashvili, Georgia has taken action to
reduce corruption. Anti-corruption efforts have resulted in
Qreduce corruption. Anti-corruption efforts have resulted in
the arrests of former officials, the radical downsizing of
state bureaucracies, effective crackdowns on smuggling and
have contributed to an increase of about 50 percent in state
revenue collections. The notoriously corrupt traffic police
were completely disbanded in mi
d-2004.
Articles 332-342 of the Criminal Code criminalize bribery.
Georgian legislation provides for civil forfeiture of
undocumented assets from public officials who are charged
with corruption offenses. Bribery is a criminal act under
Georgian law, and Parliament recently accepted a package of
constitutional amendments that make abuse of public office a
criminal offense with a maximum penalty of fifteen years
imprisonment and confiscation of property. Penalties for
accepting a bribe start at 6 years in prison and can be up to
15 years depending on aggravating circumstances accompanying
the offense. Penalties for giving a bribe can include a fine
or a prison sentence from up to 2 years or both. In
aggravating circumstances when a bribe is given to commit an
illegal act, the penalty can be from 4 to 7 years. The
definition of a public official includes foreign public
officials and employees of International Organizations and
Courts for purposes of such offenses as accepting a bribe,
giving a bribe and trading in influence. Georgia,s
legislation does not allow a local company to deduct a bribe
to a foreign official from taxes. White collar crimes such
as bribery fall under the investigative jurisdiction of the
Prosecutor's Office.
The Government,s September 2005 Anti-Corruption Strategy
calls for an effective state management system and legal and
public feedback mechanisms to prevent corruption. Among the
goals of the strategy are the identification and analysis of
conditions conducive to corruption as well as elaboration of
mechanisms for their eradication, strengthening of principles
of accountability and public disclosure in the public sector,
prosecution of lawbreakers and facilitation of competitive
development of the business sector.
According to the World Bank,s &Anti-Corruptin in
Transition 38 report, Georgia topped the list of
transitional countries in terms of anticorruption efforts.
The report reviewed the 2002-2005 time period and concluded
that Georgia saw the largest reduction in corruption among
all transition countries. The World Bank points out that
strong leadership in Georgia was the driving force behind the
swift and thorough reforms that significantly reduced
corruption after 2002. The leadership has taken bold actions
to lessen the burden of the state on the economy, improve
fiscal transparency, and strengthen oversight of
institutions, all of which has contributed to the decline in
corruption.
Georgia also significantly improved in Transparency
International's annual Corruption Perceptions Index, moving
up from 99th place in 2006 to 79th in 2007, and to 67th in
2008 out of 180 countries surveyed. The Index ranks
countries in terms of the degree to which resident and
non-resident businesspeople and country analysts perceive
corruption to exist in the public and political sectors.
Since the Rose Revolution, Georgia's score has steadily
improved. Current ranking means that Georgia (3.9 score) has
moved out of the group of countries considered to have a
"rampant corruption problem" (those under 3.0). In
comparison with countries of the former Soviet Union, Georgia
ranks well ahead of neighboring Azerbaijan (158) and Armenia
(109), Russia (147), as well as Ukraine (134) and Kazakhstan
(145).
Georgia reasserted central control over the Black Sea region
of Adjara in May 2004, reducing illicit economic activity
there. Control of contraband smuggled through South Ossetia
has improved, however the Georgian government has raised
concerns with Russia and with the international community
about continued high levels of smuggling, money laundering,
and even counterfeiting of U.S. dollars in the areas outside
its control.
Georgia is not a signatory to the OECD Convention on
Combating Bribery of Foreign Public Officials in
International Business Transactions. Georgia has not yet
signed the UN Anti Corruption Convention. The latter is on
the agenda of the Anti-Corruption Action Plan developed by
the government. The Ministry of Justice is analyzing
Georgian legislation in order to ensure its compatibility
QGeorgian legislation in order to ensure its compatibility
with the UN convention. Georgia is expected to join the UN
convention earlier than the OECD Convention.
Georgia cooperates with GRECO (Group of States Against
Corruption) and the OECD,s Anti-Corruption Network for
Transition Economies (ACN). GRECO concluded in 2006 that
Georgia had successfully implemented reforms to implement the
first round of its anti-corruption recommendations. In 2003,
ACN proposed an anti-corruption action plan and 21
recommendations for Georgia. In 2006, the OECD positively
assessed the progress of anti-corruption measures, and
considered all but four of its recommendations implemented.
Bilateral Investment Agreements
Georgia has negotiated bilateral agreements on investment
promotion and mutual protection with 26 countries, including
the U.S., Armenia, Austria, Azerbaijan, Belgium, Bulgaria,
China, Egypt, France, Germany, Greece, Iran, Israel, Italy,
Kazakhstan, Kyrgyzstan, Latvia, Moldova, Netherlands,
Romania, Turkey, Turkmenistan, Uzbekistan, the United
Kingdom, Ukraine, Lithuania and Finland. Internal procedures
have been completed and drafts are being negotiated with the
governments of India, Bangladesh, Croatia, Denmark, Norway,
Philippines, Cyprus, Indonesia, Malta, Czech Republic, and
Iceland. Ongoing consultations are being held with Belarus,
Tajikistan, Slovenia, Estonia, Slovakia, Sweden,
Bosnia-Herzegovina, Switzerland and Jordan. In 2007, Georgia
signed a Trade and Investment Framework Agreement (TIFA)with
the United States.
A free trade agreement is in force with the Commonwealth of
Independent States, and others exist bilaterally with
Ukraine, Russia, Kazakhstan, Azerbaijan, Armenia, Moldova,
Turkmenistan and Turkey. An agreement is signed, but not yet
ratified, with Uzbekistan. Ongoing consultations are being
held with the European Union, Belarus, Kyrgyzstan,
Cooperation Council of Gulf Arab States and Tajikistan.
OPIC and Other Investment Insurance Programs
From 1993 through 2007, OPIC has committed over $104 million
in financing and political risk insurance to projects in
Georgia. Projects supported include the development of hotel
and office space, production of pharmaceuticals, food
processing and farming, cold storage, banking, mortgage
lending, and financial leasing services. In FY 2007, there
were two new OPIC loan commitments in Georgia, amounting to
$11.3 million. However, in 2008, as part of the USG response
to help Georgia recover from the August conflict with Russia,
OPIC committed USD 176 million in financing. A large portion
of OPIC,s assistance will be used to underwrite mortgages
aimed at allowing Georgian banks to offer smaller more
affordable mortgages to the Georgian public. Other funding
will support commercial and residential property development
projects.
Labor
Georgia offers an abundant supply of skilled and unskilled
labor at attractive costs compared not only t
o Western
European and American standards, but also to Eastern
European. The labor force is among the best educated and
most highly trained in the former Soviet Union. While some
of the best qualified professionals and technicians emigrated
from Georgia (mostly to Russia, the U.S., and Europe) after
the Soviet Union's collapse, many have remained in the
country or returned from abroad and are attempting to find a
new role in a market economy. Unemployment remains high and
job creation has been a particular challenge.
The labor market in Georgia is one of the world's freest.
Wage negotiations take place between employees and employers,
and trade unions are not powerful. Labor, health and safety
laws are not considered an impediment to investment. A new
labor code which entered into force in June 2006 considerably
liberalized labor regulations. The code defines the minimum
age for employment (16), work hours (41 per week), annual
leave (24 calendar days) and leaves the rest to be regulated
by agreement between the employer and employee.
Payment of at least one month,s salary is required if the
employer initiates a dismissal. Employees must give one
month,s notice of intention to quit. No notice requirement
is imposed on the employer prior to dismissal. Employees are
entitled to up to 126 days (4 months) of maternity leave, and
together with unpaid leave, up to 16 months. Under the new
Labor Code, a contract of employment may bar an employee from
QLabor Code, a contract of employment may bar an employee from
using the knowledge and qualifications obtained while
performing his duties with another employer. This provision
may remain in force even after the termination of labor
relations.
Starting from January 1, 2008, employers are no longer
required to pay social security contributions for employees.
The former 12 percent income tax paid by employees and 20
percent social security tax paid by employers on their
employees' wages was merged into a unified personal income
tax at the rate of 25 percent in 2008, shifting the
employer's tax burden to the employee. From January 2009,
the overall effective tax rate paid by both self-employed
persons and employees has been further reduced from 25
percent to 20 percent. The state social security system
provides modest pension and maternity benefits. The minimum
monthly pension is USD 52, and the government is planning to
increase it. The average monthly salary in the third quarter
of 2008 was GEL 854 (USD 520) for government employees and
GEL 560 (USD 337) for private sector employees. The minimum
wage for government employees is GEL 115 (USD 69) per month.
The minimum wage in the private sector has not changed in
many years at GEL 20 (USD 12) per month, but few if any
workers earn so little.
Georgia has signed multiple ILO agreements, including the
Forced Labor Convention of 1930; the Paid Holiday Convention
of 1936; the Anti-Discrimination (employment and occupation)
Convention of 1951; the Human Resources Development
Convention of 1975; the Right to Organize and Collective
Bargaining Convention of 1949; the Equal Remuneration
Convention of 1951; the Abolition of Forced Labor Convention
of 1957; the Employment Policy Convention of 1964; and the
Minimum Age Convention of 1973.
Foreign Trade Zones/Free Ports
In June 2007 the Parliament of Georgia adopted a law on free
industrial zones, which sets forth the terms for forming and
functioning of free industrial/economic zones in the country.
Financial operations in such zones may be performed in any
currency, and foreign companies operating in free industrial
zones will be exempt from taxes on profit, property and VAT.
Georgia,s Ministry of Economic Development has allocated a
400 hectare area adjacent to the Black Sea Port of Poti for
the first such zone. RAK Investment Authority (Rakeen group)
became the owner of 100 percent share of LLC Poti Sea Port.
The UAE-based company pledged to develop a free economic zone
on 300 hectares of land in Poti and to build a new port
terminal on a 100 hectare site. Rakeen plans to accomplish
its ambitious project within four years and turn Poti Seaport
into an international industrial zone with port, railroad and
other facilities.
Foreign Direct Investment Statistics
Foreign Direct Investment (FDI) in Georgia peaked several
times. In 1997-1998 and 2003-2004, peaks were related to the
construction of the Baku)Supsa and Baku-Tbilisi-Ceyhan
pipelines. However, despite completion of the pipelines,
foreign investment inflows in 2006 -2007 were larger than
ever before, due to privatization of state owned enterprises
and the impact of economic reforms. The total volume of FDI
in Georgia in 2006 USD 1.1 billion (13 percent of GDP) and it
increased 197 percent over the 2005 figure. FDI inflows in
2007 were $2,014,842,000. FDI flow in the first half of 2008
once again proved the viability of Georgia,s economic
potential. However, the August 2008 conflict with Russia
undermined investor confidence, and the subsequent world
credit crisis further restricted the inflows of FDI. Despite
these challenges, more than USD 3 billion flowed into Georgia
in first three quarters of 2008 (81 percent more than in
2007), but in the fourth quarter, FDI inflows slowed to a
trickle. Much of the recent investment has been in the real
estate and banking sectors.
Official statistics on Foreign Direct Investment (FDI)
inflows during recent years are as follows:
2000 - USD 131,232,000
2001 - USD 109,840,000
2002 - USD 167,362,000
2003 - USD 339,393,000
2004 - USD 497,827,000
2005 - USD 449,786,000
2006 - USD 1,091,100,000
2007 ) USD 2,014,842,000
2008 (Q1-3) ) USD 3,655,001,000
Breakdown of investments by major countries (USD 1,000,s):
- 2005 2006 2007 2008 (1-3 Q)
Total 449,785 1,190,375 2,014,842 3,655,001
UK 132,925.8 186,824.1 145,474.8 465,224.7
USA 15,025.6 182,651.5 84,412.2 282,089.3
Kazakhstan 0.0 152,310.5 88,486.2 240,796.7
QKazakhstan 0.0 152,310.5 88,486.2 240,796.7
Turkey 21,812.5 129,727.8 93,871.1 245,411.4
Norway 23,620.9 77,894.8 34,200.1 135,715.8
Azerbaijan 66,920.2 77,804.5 41,368.1 186,092.8
Italy 22,833.5 47,219.1 15,228.1 85,280.7
Cyprus 47,537.3 40,071.2 148,643.6 236,252.2
Russia 38,737.6 34,210.0 88,996.5 161,944.2
France 14,383.3 17,221.7 43,726.0 75,331.0
UAE 280.5 422.6 130,858.7 131,561.9
Denmark 319.0 42,477.8 158,126.2 200,923.0
Netherlands 492.0 18,530.2 299,277.2 318,299.3
Czech 1,279.6 15,032.2 227,926.4 244,238.2
Japan 16,610.1 34,433.1 34,368.3 85,411.5
Virgin Isle 4,900.2 129,727.8 187,815.5 322,443.6
Breakdown of investments by economic sectors (USD 1,000,s):
- 2007 2008 (I-III Q)
Total 2,014,842 1,105,420
Agriculture/Fishing 15,527.9 13,256.8
Industry 398,240
,9 150,868.3
Energy 362,581.1 165,290.8
Construction 171,891.8 51,998.1
Transport/Communication 416,694.7 312,813.4
Real Estate 30,543.9 149,757.0
Financial Intermediation 136,914.5 73,578.0
Other Services 382,806.6 182,924.2
Other 99,640.2 4,933.2
The UK tops the list of foreign investor countries. Its
share in total investments of 2008 three quarters was up to
12.7 percent compared to 7 percent in 2007. The next largest
investors were the Netherlands (USD 318 million), the USA
(USD 282 million), Turkey (245 million)and Czech Republic
(244 million).
The U.S. has been one of the largest foreign investors in
Georgia since 1999. In 2000, U.S. investors accounted for 30
percent of FDI in Georgia; in 2001 for 25.7 percent of FDI,
which increased in 2002 to 49 percent. In 2003 and 2004 the
U.S. share decreased to 21 and 16 percent respectively and
dropped to 4.1 percent in 2005. The decline can be
attributed to the completion of large pipeline projects as
well as increased inflow of capital from other countries. In
2006, U.S investment still accounted for 16.7 percent of the
total, but was only 4.1 percent in 2007, and 7 percent in the
first 3 quarters of 2008.
Other notable trends include increase in United Arab
Emirate,s interest in Georgia, evident in the investments of
the Rakeen and Dabi Groups in the port, real estate, banking
and other sectors. Source: Statistics Department of Georgia.)
End Text.
LOGSDON

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